Retail RETAIL

The view from the shop floor

tanding on the steps looking across the parking store in the city shortly before the lot towards the Exhibition Centre, the closures elsewhere. doorman of Tower Shopping City It’s clear that a large portion of points to the idle cars and says, "Look at the luxury sales in Hangzhou are now registrationS plates. Most of them are from outside driven by the tuhao (a Chinese term Hangzhou." Shoppers in for nouveau riche) travelling in from Hangzhou Tower is one of the city's largest and most Hangzhou used nearby towns and cities – where to be 'crazy', but high-end shopping destinations, showcasing international factory owners and their kin get rich now they've labels such as Louis Vuitton, Cartier and Armani, as well as and flaunt it. But as traditional become more domestic luxury brands like Shanghai's Yifei and Inner rational in their manufacturing is declining, the tuhao Mongolia's Erdos, which specialise in silk qipaos purchasing are becoming more frugal. (traditional figure-hugging Chinese dresses) and cashmere habits – so Meanwhile Hangzhou’s local 800,000 clothing respectively. Louis Vuitton opened its boutique business has shoppers are becoming more Size in square in the city in 2004, turning over Rmb400,000 ($62,500) slowed a little, discerning. As a staffer at Hangzhou metres of in its first four hours, and pioneering the way for other but it still seems Tower told us: "Shoppers in good Hangzhou’s luxury brands to follow suit. Hangzhou used to be 'crazy', but now high-end Mix However, sales haven't maintained that initial pace. they've become more rational in their City mall Luxury labels have been suffering weaker sales across habits – so business has slowed a which , spurred by the slowdown in economic growth and “ little, but it still seems good." opened in the crackdown on corruption. In 2015 Louis Vuitton closed Hangzhou Tower actually consists 2010 three stores: in Guangzhou, Harbin and Urumqi. But the of four towers connected by brand evidently has faith in Hangzhou: it opened a new footbridges so that it straddles the

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Two Apple Stores Praising in the Rain Hangzhou’s flagship Apple Store was opened on Shimmering water on sunny days, Pinghai Road in January 2015, as one of five Blurred mountains through rainy haze; Apple Stores that the San Cupertino-based firm West Lake is like the beau ty Xizi: had pledged to open in China before the Spring With makeup heavy or light, she is always beautiful. Festival rolled around that year. The grand opening received much-appreciated attention from Apple (Xizi, also known as , is one of the of ancient China, and she lived in Zhejiang province. The West Lake is said to be an incarnation of her beauty, and sometimes CEO Tim Cooke, who made a big deal of the event will be called by her name.) by tweeting, "Starting Something New in Hangzhou, China!" Before its opening, the glass storefront was covered in paper, bearing a calligraphic rendering of the poem “Praising West Lake in the Rain” by the poet (1037 – 1101). The calligraphy was performed by local master Wang Dongling, who says the piece reflects the city’s duality: “Hangzhou is a traditional city that has preserved the essence of ancient Chinese culture, but is also a modern city open to new ideas.” Certainly Apple thinks Hangzhou is a healthy market, being one of the three launch cities in China for its premium Apple Watch – designed in partnership with Hermès. The company promptly opened a second Hangzhou store last April. The second is located in the Mix City Mall.

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The leading malls in Hangzhou

Hangzhou Tower Shopping City（杭州大厦购物城） • Opened: 1988 • Size: 140,000 square metres • Location: Wulin District, Wulin Square • Demographic: High-end Retail sales of consumer goods • International stores: Louis Vuitton, Dior, Armani, Cartier, Gucci Rmb billion % growth Retail sales Real growth Mix City/MixC Mall 万象城( 450 25 • Opened: 2010 383.9 • Size: 800,000 square metres 400 19.9 • Location: Qianjiang New CBD 18.7 353.1 20 • Demographic: High-end 350 15.8 294.5 • International stores: Prada, Hollister, Fe ndi, Louis Vuitton 300 254.8 15.5 15 INtime Department Store 银泰大厦( 250 214.6 • Opened: 1998 13.0 200 180.5 • Size: 51,000 square metres 10 • Location: Wulin District, Yan’an Road 150 8.7 • Demographic: Mid-high end • International stores: H&M, Clarks 100 5 IN77/Hubin 湖滨银泰( 50 • Opened: 2005 0 • Location: Hubin District, Pinghai Road 0 • Demographic: Mid-high end 2009 2010 2011 2012 2013 2014 • International : Gap, Forever 21, Gucci, Prada

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North Ring Road. Walking between the shops in the Singles’ Day – the caters to a broader range of desires, towers – which are all tenanted though quiet – the single largest with 40% of its free space given over constant competition between Hangzhou’s malls is shopping event in to food, drink, and entertainment apparent. Sinopolis is there just after Singles' Day – the the world – was (the top floor of this mall houses a single largest discount shopping event in the world – and commercialised cinema, which INtime boasts is the in Hangzhou whilst the stores in Hangzhou Tower weren’t offering closest cinema to the West Lake). “I got my story, promotional sales to mark the day, many advertised a Similar tenant diversity my dream from discount period from November 12 (the day after Singles' characterises the Mix City Mall America. The Day) to November 16. A shop assistant explained why: (MixC) – the second location this hero I had was “This isn't because of Singles' Day, this is because the mall brand has chosen in China after Forrest Gump. INtime Department Store is celebrating its birthday, and success in Shenzhen. Opened in I’ve watched so we have to compete.” 2010, this gigantic complex only that movie INtime Department Store (also named Yintai Mall) has allots 40% of its occupied space to about 10 times. its main complex on Yan'an Road, which runs north to traditional shops: the rest is split Every time I get Hangzhou Tower and is the street purportedly with the between dining, entertainment, frustrated I highest retail rents. Similar to the towers, INtime sporting facilities and other services. watch that Department Store is divided into several, multi-storey MixC houses an Olympic size ice- movie” buildings, each with a specific target demographic – men, rink, which welcomed Olympians women and children. This mall is somewhat less high-end Shen Xue and Zhao Hongbo for the Jack Ma, the than its competitor to the north, featuring brands such as mall's lavish opening ceremony. boss of Alibaba H&M, Clarks and Mango. Understandably, perhaps, it However MixC's performance has and Hangzhou’s most famous appears busier. been less stellar. Revenue declined resident However it is not this INtime mall which is celebrating 12.5% in 2013 and 20% for the Spring its birthday. That is the INtime Mall at West Lake, further Festival period in 2015. During that to the south, which opened in November 2014. Compared period in 2015, for example, with its predecessor on Yan'an Road, the West Lake mall Hangzhou Tower found the going as

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A growing wine market Treasury Wine Estates’ China sales director for its wholesale division, Jack , says the Australian wine giant began working with a new distributor in Hangzhou about six months ago. “That distributor has delivered exciting results,” says Treasury Wine Wu, adding that Hangzhou is the headquarters for all sales in Estates’ Jack Wu Zhejiang province. says Hangzhou He describes Hangzhou as a “wealthy market” and says already has an thanks to e-commerce and a strong private sector, there is entrenched already a very entrenched middle class. He adds that the middle class open people of Hangzhou tend to be smart and well-educated as to drinking well as discerning spenders. And because so many of its now being heavily promoted at a price-point just below foreign wines citizens have relatives that live or study abroad, he believes Rmb300 (or $45.62, which Wu says is a watershed for there is widespread interest in foreign brands. categorising a wine as luxury or affordable). His distributors, Among the 10 local Chinese markets in which Treasury he says, are making much of the fact that the number 28 has distributors, Wu forecasts the Hangzhou/Zhejiang partner sounds in Mandarin like ‘love’ and so this is also a perfect will be one of the top performing within the next two years. choice for celebratory dinners. Part of the reason is the company’s strategy of pushing more Wu’s upbeat view on wine sales in Hangzhou offers a affordable wines from its portfolio to target middle class proxy of sorts for the city’s overall retail market. It indicates consumers and newer wine drinkers. Treasury’s pricier wines that while the luxury end of the market may face tougher include Penfold’s Grange and Stag’s Leap, but the product set times, brands that target the growing middle class with to see the strongest sales may be Penfold’s Bin 28, which is affordable, high quality products are best placed.

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Online or offline?

Hangzhou is commonly considered as China’s capital of e-commerce, in part due to its status as the home of Alibaba Group. Amongst other things, Alibaba is the mastermind behind the commodification of Singles’ Day – celebrated on November 11. Last year on Singles’ Day, the e-commerce giant logged a record Rmb19.2 billion ($14.3 billion) in sales revenue. But as the Alibaba empire has grown, it has not only brought more shoppers online, it has also drawn more capital into its hometown, helping raise disposable income (Rmb39,099 per capita in 2014) and fuel the consumer market. Retail sales have seen strong growth in Hangzhou, rising 8.7% year-on-year in 2014 to a total of Rmb383.9 billion (according

to Savills World Research). But although sales are increasing, the rate of REUTERS increase appears to be in decline: 2014’s 8.7% growth was 4.3 percentage points lower than the year before. Nevertheless, development of commercial districts in the city is also set to continue. Qianjiang New CBD will see the opening of Raffles City, China. Approximately 40% of that figure was spent on retail. (The another shopping mall, and the Binjiang district – currently the heart of remainder is composed of expenses such as bill payments, loan Hangzhou’s tech industry - will soon house its first large retail complexes. repayments and investments.) Further research from Savills found that Yet even in the physical world of bricks and mortar there is room for 2014 online consumption in Hangzhou was up 38.5% on the year before, Alibaba. Alibaba Group operates a mobile payment service called Alipay, peaking at Rmb90 billion: much higher growth but still a lower total than which is used widely throughout China and most heavily in Hangzhou. The in-store bricks and mortar sales. service can be used for purchases online as well as in stores, restaurants Meanwhile Sav ills found that vacancy rates across Hangzhou’s and other outlets (using a smartphone). shopping malls in 2014 grew by 4 percentage points to 8.7% (a slump Data from Alipay shows that in 2014 Hangzhou’s per capita which it primarily attributes to the vacancy created by the closure of the expenditure on Alipay reached Rmb44,197 ($6,721) – the highest level in Central Department Store in Mix City Mall).

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tough as MixC, and only INtime Department Store saw an Car sales stall increase in sales. Like so much success in Hangzhou, Hangzhou lays claim to the unenviable title of China’s INtime's is undoubtedly linked to its affiliation with second most congested city. In addition to congestion, the Alibaba – the e-commerce giant owns a 32.8% holding in number of cars contributes significantly towards the city’s Intime Retail Group, and the mall utilises Alibaba's Tmall air pollution (exhaust emissions account for 40% of it). In to provide O2O services (such as picking up products a bid to tackle both of these problems, Hangzhou was the bought online). sixth city in China to implement “registration restrictions”. INtime’s own luxury retail complex is Hubin INtime These restrictions include a range of policies but most Thanks to a Mall. The first stage of this plaza (Hubin International notably consist of the following: firstly, a curfew or a decade long Boutique Compound) was opened in 2005 and welcomed complete moratorium of usage on cars according to their boom in car sales the likes of Gucci, Dolce & Gabanna, and Cartier – all of registration numbers (cars with an even number will be Hangzhou has which still operate boutiques there, and have been joined restricted from the roads one day, then cars of odd the unenviable by the likes of Louis Vuitton (its third store in the city), numbers the next); secondly, the reduction in the number title of China’s Prada, and Yves St Laurent. The staying power of the of new registration plates sold annually, which limits the second most boutiques that initially opened in the mall 10 years ago is number of new vehicles on the road. congested city intriguing, as the atrium of this upmarket venue When Hangzhou announced the latter policy in 2014, it appeared perpetually empty during visits by Sinopolis in did so a few hours before it was due to take effect. The November 2015. result was a last-minute surge in buying activity, as Hangzhou Hubin INtime has recently gone through two citizens rushed to purchase new cars and the all- more stages of development and a rebranding to expand its important licence plate. A report from Xinhua claims that coverage and its appeal. It now goes by the name IN77, and over 70,000 vehicles were ordered that single day. Under additions to the original mall now include high-street the revised system, only 80,000 licence plates are issued brands Forever 21 and Gap, as well as Hangzhou's flagship each year in Hangzhou: 80% through a lottery system Apple Store. The greater popularity of this section of the (like in Beijing) and 20% through an auctioning process mall – versus the original areas catering to luxury buyers – (like Shanghai). The auction prices start at roughly speaks of the retail sector’s changing emphasis. Rmb10,000 ($1,628).

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Prime rents and vacancy rates, Q4/2013 vs Q4/2014

Q4/2013 rent (LHS) Q4/2014 rent (LHS) Q4/2013 vacancy (RHS) Q4/2014 vacancy (RHS)

27 18% 24 16% 21 14% 18 12% 15 10% 12 8%

SOURCE: SAVILLS RESEARCH 6%

RMB per sq m day 9 6 4% 3 2% 0 0% Prime Non prime Overall

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IKEA’s patience pays off IKEA is the salvation of many a home decorator on a budget, and the Swedish icon fares well in China where it is not only a popular shopping destination, but even a dating spot for silver-haired singletons (or as a choice for a midday nap). In the year ending August 2015, sales growth in China was 19% – IKEA’s fastest growing market – Sales growth in China and three new stores were opened was 19% – IKEA’s fastest nationwide. Last June, Hangzhou welcomed growing market one of those three: China’s 17th IKEA store. The shop is located in the Yuhang district, 30 minutes away from the city centre by Metro Line 1 (stop at Qiaosi). It is larger than IKEA’s Shanghai outlet, housing 60 showrooms exhibiting over 8,000 items, as well as a restaurant that can seat over 600 diners, and of course a play area for the children. The Hangzhou outlet had been long anticipated. Planning for the store began in 2008, with construction finally commencing in 2013. Perhaps the long wait has encouraged the high volume of shoppers: in the first six months of its

opening, IKEA’s Hangzhou store had already signed up REUTERS 400,000 new members.

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In 2013, the year before the ban, 276,000 new cars were sold in Hangzhou. In 2014, the official figure for the total number of registered vehicles on the city’s roads was 2.7 million. According to Qianjiang Evening News (a local paper) the Hangzhou government is scrapping thousands of old and environmentally unfriendly cars each year, and had plans to dispose of at least 60,000 in 2015. In 2015, new car sales amounted to roughly 200,000, indicating that people are still willing to purchase, even if The Hangzhou obtaining a licence plate is more difficult. However this government figure demonstrated the third year of declining new car scrapped 60,000 sales in the city. Paradoxically, second-hand car sales rose old and to a similar level to new cars sold (at around 200,000), the environmentally first time this has happened (the second-hand car market unfriendly cars in has only recently started to develop, with most Chinese 2015 traditionally preferring to buy a new vehicle). One explanation for the rise in second-hand sales is that these cars come with a (now coveted) licence plate. REUTERS

Hangzhou’s new car sales dropped to 200,000 in 2015

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